Bill Ackman has a lot of questions for Herbalife — as a matter of fact, 284 of them.
The hedge fund manager fired off 40 pages of questions at the controversial nutrition company that he has called a “pyramid scheme” and is shorting to the tune of $1 billion.
Ackman, the founder of Pershing Square Capital, focused his questions on the lack of clarity about retail sales and product consumption. He also hammered away at the company’s recruiting practices and its much-touted “Nutrition Clubs,” which are forbidden from advertising or selling products.
Ackman also brought up some new issues regarding product safety at a manufacturing facility and asked if the company was aware of alleged money laundering through an Herbalife account in Mexico, which was the subject of a published reported a year ago.
The hedge fund activist, who announced his short thesis against Herbalife in detail on Dec. 20, promised to come back to Herbalife with a set of questions after the company refuted his initial claims at a Jan. 10 investor presentation.
“Herbalife executives have repeatedly committed to have a fact-based conversation and total transparency about Herbalife’s business,” said Ackman in introducing his laundry list of questions.
“If the company is committed to ‘total transparency’ as it has claimed, Pershing Square would welcome responses to the following questions.”
Ackman’s latest attack on Herbalife quoted several legal opinions related to the pyramid scheme issue.
He cited a 1986 California injunction that restricts Herbalife from compensating its distributors on anything other than retail sales. But since the company has repeatedly said it doesn’t and cannot track retail sales, Ackman asked, ”How is it possible for the company to be in compliance with the injunction?”
In its Jan. 10 presentation, Herbalife also claimed that most of its distributors buy the product to get a discount for their own consumption and that of family and friends — not to make money.
That would help explain why 88 percent of their US distributors make no money, according to new figures the company released yesterday.
But if that’s the case, Ackman asked: “Why are discount customers required to sign a 48,000-word Distributor Agreement in order to purchase Herbalife products?”
Ackman’s presentation also noted a Federal Trade Commission statement posted on its website Jan. 28 after it shut down Fortune High-Tech Marketing. The statement read:
“If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is mainly based on the number of people you recruit and your sales to them, it’s a pyramid scheme.”
“In light of the above statements by the FTC, does the Company still believe that it can be indifferent to the amount of product sold or consumed within the network versus the amount of sales to independent third parties in the determination as to whether Herbalife is a pyramid scheme?” Ackman asked.
Ackman also asked the company whether it knows if the Securities and Exchange Commission is investigating Herbalife “or any of its affiliates” or if there are any ongoing investigations by Herbalife by any US federal or state agencies or by any foreign regulatory agencies.
The market seemed unimpressed. By midday, Herbalife stock had jumped 2.8 percent to $36.81.